Estee Lauder

After three years of organic sales declines (averaging 3% annual drops between fiscal 2023 and 2025), Estée Lauder appears to be turning a corner, with organic sales up 3% in fiscal 2026. This growth came alongside improving profits, with adjusted gross margin up 150 basis points to 75.5%.

The bottom line: We believe Estée's wide Morningstar Economic Moat Rating holds, supported by a strong brand edge, entrenched retail relationships, and a cost advantage. However, we've slightly cut our fair value estimate to $110 per share from $120, reflecting a modestly higher discount rate. Our Standard Morningstar Capital Allocation and High Morningstar Uncertainty Ratings also hold. The stock trades at a 15%-20% discount to our valuation. We don't think the market is giving the firm credit for the changes, including an outsize emphasis on innovation, expanded distribution, and efficiency initiatives that should yield profitable sales growth over the long term.

Between the lines: Estée Lauder has worked to overcome intense macro and competitive headwinds by enhancing its cost position (with its sights set on unlocking $1.2 billion in savings) to fuel investments in its brands; we don't think it will veer from this course. Our forecast calls for Estée to funnel nearly 30% of sales (about 200 basis points north of its historical average) annually into research, development, and marketing to solidify its brand standing with retailers and consumers. These efforts are beginning to manifest in market share gains. Management has conveyed that Estée has since posted six consecutive quarters of improving market share in China and posted an increase in volume share across its US business in fiscal 2026.

Long view: Even as it closed the door on a transformational tie-up (after terminating merger talks with Puig in May), we think Estée still yearns to act as a consolidator. But we expect it to eye a bolt-on deal that can boost its geographic, category, and/or distribution reach.

After reassessing our assumptions, we're trimming our fair value estimate for Estée Lauder to $110 per share, from $120, reflecting modifications to our working capital assumptions. In addition, we've raised our weighted average cost of capital estimate by 10 basis points to 7.3%, though our assessment of the firm's business risk is unchanged. Our revised valuation implies a fiscal 2027 enterprise value/adjusted EBITDA multiple of 19 times.

Estée had succumbed to lackluster innovation and a complex distribution footprint overweighted to US department stores (which remain in secular decline) and travel retail (which had represented more than one-quarter of its consolidated sales base). However, under its Beauty Reimagined playbook, Estée has made strides in freeing up capital to reinvest in its brands and capabilities, while also rationalizing distribution in less-trafficked channels and expanding its presence online (including on Amazon and TikTok) and in specialty outlets, like Sephora. We think more consumer-relevant innovation in frequented channels should drive 3.5%-4.0% annual sales growth through fiscal 2036, supported by balanced contributions from higher prices and increased volumes over the longer term. Within this, we expect the firm’s efforts to leverage its acclaim in premium skin care (up 4%, about half of sales) and makeup (up 2%, nearly 30% of sales) should propel improved performance in China (up 6%, one-quarter of sales).

We anticipate that Estée will continue to maintain a more stringent eye on its cost structure, after the strides made to harness efficiencies within procurement and its supply chain (with its current initiative set to unlock $1.2 billion in costs). More specifically, we expect gross margins will expand 200 basis points over the next 10 years to 77.5% by fiscal 2036, while selling, general, and administrative expenses will deleverage to about 29% (from the low 30s). However, we forecast that a portion of any savings realized will fuel brand spending, as we call for Estée to funnel nearly 30% of sales annually into research, development, and marketing to solidify its brand standing with retailers and consumers (almost 200 basis points above the prior 10-year average). Taken together, this results in midteens average operating margins over our explicit forecast.

We believe Estée Lauder’s leading brands, entrenched retailer relationships, and strong cost position warrant a wide Morningstar Economic Moat Rating. Estée is exclusively focused on the prestige beauty enclave (around 40% of beauty spending in aggregate, as cited by Euromonitor), with six brands that generate more than $1 billion in sales annually and another four with at least $400 million in annual sales, across skin care, color cosmetics, fragrance, and hair care. Quantitatively, its edge is illustrated in returns on invested capital, including goodwill, that have averaged 17% over the past 10 years, surpassing our 7% weighted average cost of capital estimate. We expect it to continue posting excess returns for the next two decades, with our forecast calling for around 18% average returns through fiscal 2036. However, if the firm’s fare begins to miss the mark with local consumers and/or it pays up for inorganic deals to juice its prospects, this could signal its edge has been dented.

Amid the fragmented $430 billion global beauty care market, Estée’s quality ingredients, product efficacy, and personalized customer service underpin the intangible assets that support its wide moat. Further strengthening its standing with consumers is an aversion to untested brands, combined with the conspicuousness of consumption that tends to characterize beauty purchases (particularly as fragrances are often given as gifts). Taken together, these factors have resulted in outsize share for Estée. For one, Estée now holds a 16% share (up from 11.6% in 2016, nearly half of its sales) of the prestige arm of global skin care, about 100 basis points above the largest global beauty care firm, L’Oréal. It has also carved out more than 21% in the prestige color cosmetics enclave (above L'Oréal's less than 16%). In contrast, private-label offerings have failed to make inroads, amassing only a low-single-digit share, versus the teens to low-20s levels common in the US consumer goods sphere.

We attribute Estée’s category-leading performance to a steady stream of innovation across its brands that engages consumers of a variety of ages and demographic profiles. The firm has expended more than $300 million annually (2.1% of sales) on research and development and nearly $4 billion on marketing (a mid-20s percentage of sales) on average over the past few years, both of which generally approximate our forecast through fiscal 2036 (though modestly below the 3% and 32% respective levels L’Oréal has historically allocated). Importantly, these new products are landing well with consumers, as this fare drove almost one-quarter of sales in fiscal 2026, and we don’t expect the firm to back down from these endeavors.

Estée’s brand strength is also reflected in its pricing power. For one, the firm boasts a gross margin of more than 75%, generally in line with global beauty peer L’Oréal but above the 40%-60% marks that tend to characterize other wide-moat household and personal care firms. In addition, Estée has historically chalked up balanced contributions from higher prices and increased volumes, and we forecast that formula (a nearly 2% contribution from price and volume) to persist over our 10-year explicit forecast.

The other leg of its intangible asset advantage rests in its entrenched standing with retailers. Even as the channel mix accelerates toward digital, we believe brick-and-mortar relationships remain necessary to provide in-person discovery and trial of beauty products and preserve customer relationships. Beyond pruning freestanding retail doors (by a low-double-digit percentage) and exiting some department store counters, Estée has expanded into alternative distribution outlets (like Amazon, TikTok, and Sephora), which can help the company’s offerings reach new consumers more effectively. From where we sit, Estée’s stable of leading brands and on-trend innovation will keep it a valued partner for retailers, helping drive traffic into stores and onto e-commerce platforms.

Beyond its dominant brands and retailer clout, we also surmise that Estée benefits from a cost edge, with its scale affording negotiating leverage in procurement, manufacturing, and marketing. To assess the firm’s cost position, we’ve tried to home in on direct operating costs related to manufacturing and distribution while removing discretionary costs such as advertising and R&D, noncash costs including depreciation and amortization, and nonrecurring expenses to gauge its ability to cover customer acquisition costs. On this basis, Estée boasts a direct operating margin of around 37%, outpacing the 35% average for the competitively advantaged household and personal care companies we cover.

Admittedly, sales declines between fiscal 2023 and 2025 could suggest the firm’s competitive edge has been impaired; however, the weakness was largely confined to China (25% of sales), where its top line plunged 9% in each of fiscal 2024 and 2025 on soft travel retail demand (a slice of industry that fell double-digits). But we’ve believed this decline was a byproduct of local macro factors (waning consumer spending as sentiment soured). In this vein, management has conveyed that Estée has since posted six consecutive quarters of market share gains in China after applying its revamped strategic playbook. According to Euromonitor, it holds more than 9% share of prestige color cosmetics and 19% in prestige skin care, 510 basis points and 650 basis points above 2016 levels, respectively. We expect an enhanced ability to respond to local consumer preferences following the opening of its new manufacturing and distribution facility in Japan. This supports our forecast for mid- to high-single-digit regional sales growth over the next several years, outpacing the broader industry's low- to mid-single-digit outlook. However, even if Estée’s growth trajectory in China falters, we don’t surmise this would thwart its ability to generate excess returns (still approximating a teens to low-20s level) over our forecast.

Private-label penetration in beauty is negligible, at just a low-single-digit percentage across skin care, makeup, fragrances, and hair care, lagging the high-single to low-double-digit levels in the broader household and personal care landscape.

We believe cost savings (targeting up to $1.2 billion) will fund investments to strengthen Estée's brand position. Our forecast calls for allocating nearly 30% of sales annually to research, development, and marketing.

Estée focuses exclusively on the prestige beauty enclave, which offers outsize growth prospects relative to global beauty.

A downdraft in duty-free demand has weighed on Estée's China business (about 25% of sales), and recent gains may prove fleeting as consumer sentiment in the region remains dour.

Estée Lauder is a controlled company, with the founding family holding more than 80% of the voting rights and four board seats, which could prevent minority shareholders from driving change.

Despite efforts to adjust its distribution, the mature department store channel, in structural decline, still accounts for about one-quarter of Estée's North American business.